Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.

Sunday, February 16, 2014

Bitcoin Updates - February 16 , 2014 - Mt Gox bitcoin price has a massive intraday swing , yanked up to 540 and then crashing down to 224 around 8:02 AM EST ..... Mt Gox protest photos from Saturday February 15 , 2014- from Tokyo ..... NY Post calls bitcoin a ponzi scheme ......... Mt Gox raked in allegedly 1.9 million in trading fees from 2/4/14 through 2/15/14 ..... wonder how much still raked in for 2/16/14 ........ MIT tells NJ to back off its students threatened by legal action concerning Tidbit ...... A CoinDesk poll of nearly 3,000 readers has found that Mt. Gox customers have been waiting months for their withdrawal requests to be fulfilled, despite being ‘verified’ or ‘trusted’ account holders. Poll respondents describe frustration with the exchange’s customer service, calling it slow, opaque and providing “canned responses”, Of the 569 respondents who wrote up descriptions of their Mt. Gox experience, eight mentioned that the exchange had offered to speed up the processing of their withdrawal requests for a fee of 5% of the transaction amount. Mt. Gox’s FAQ for withdrawals and deposits does not mention a 5% fee for quicker withdrawals ....... Bitcoin Regulation in the UK - if the FCA does not and will not regulate bitcoin , is there consumer protection for UK bitcoin users / traders / businesses ? Undertanding how taxation will be applied and money laundering concerns also unclear at this time in the Uk ...

Is Bitcoin Greatly Rotating Into Bullion?

While correlation is not causation, the coincidental timing of the tumble in virtual currencies and the surge in physical (alternative) currencies suggests another great rotation may be occurring... with gold at fresh 3-month highs as Bitcoin presses 3-months lows...

While not surprising, the chart above also shows the massive collapse in Mt.Gox pricing as the world and their virtual pet rabbit run for the exits...

What’s the key to the perfect pump-and-dump Ponzi scheme? Plausibility and prey.

Meet the new wolf of Wall Street: bitcoin, the anonymous computer “Tinkertoy crypto-currency,” as we dubbed it in a year-end column.

And now the crypto-currency has toppled, with bitcoin values cut in half in the last week, if you can even get your “money” back.

Ponzi-type scams have been around since the 1920s. The greed and dishonesty never change; the techniques just keep evolving. Wolves like to eat.

For sure, they are harder to spot these days than the one in Martin Scorsese’s Oscar-nominated film “The Wolf of Wall Street.”

Long gone are the silk-suited in-your-face wise guys, waving bottles of Dom Perignon around and snorting coke off the bodies of prostitutes at parties.

Today’s wolves are much greedier and much more sophisticated. They are faceless, anonymous cyber-criminals. Bitcoin was their tool, their penny stock, their empty shell company. In the fall of 2011, bitcoin was at $2. By November 2013 it had risen to more than $1,000!

If that’s a currency, those bitcoinians must be some productive citizens.

Today it stands at $350. All is not well: Bitcoin, the anarchist currency used by drug dealers and other illicit sorts, has fallen into, um, bits and pieces.

I truly feel bad for the innocent people who got conned into investing in the bitcoin shell game, but fortunately there really were not that many widows and orphans who got taken here. Mostly it was some of the people who thought they were “the smartest guys in the room.”

Today, many of the largest bitcoin exchanges located around the world claim they have been under “cyberattack” and have halted redemptions, including Japan’s Mt Gox, the third-largest “exchange.”

As a digital delivery system, perhaps bitcoin can be saved. But a currency built by hackers and anonymous code-writing anarchists offers a pretty weak alternative to cash, credit cards or PayPal.

But if you saw the movie, you know that “wolves” lure the unwary in, let them feed and grow comfortable for a while — and then the wolves pounce.

Welcome to the 21st-century Ponzi scheme.

MIT to New Jersey: Back off our students

MIT President L. Rafael Reif says he and MIT are standing behind students threatened by New Jersey with legal action if they don't turn over detailed information about a "proof of concept" project involving the online currency Bitcoin.

I want to make it clear that the students who created Tidbit have the full and enthusiastic support of MIT. Chancellor Cindy Barnhart and Provost Marty Schmidt met with the students yesterday. They and General Counsel Greg Morgan also spoke with the Electronic Frontier Foundation (EFF), which is providing to the students, pro bono, the independent legal representation that they need. We will remain in close coordination with the students and the EFF to offer assistance in the legal proceedings.

Reif's complete message:

To the members of the MIT community:

I am writing to address a problem that a group of MIT students currently face but that concerns all of us, because it highlights issues central to sustaining the creative culture of MIT.

The students in question are the creators of Tidbit, a proof-of-concept code for a novel Bitcoin-harvesting strategy. After Tidbit won the "most innovative" award in a recent hackathon, the State Attorney General of New Jersey demanded that the students turn over a sweeping set of documents, code and information—a surprising and difficult turn of events for the Tidbit team.

I am grateful to all those who have written to me to express their concern about this situation, and I want to make it clear that the students who created Tidbit have the full and enthusiastic support of MIT. Chancellor Cindy Barnhart and Provost Marty Schmidt met with the students yesterday. They and General Counsel Greg Morgan also spoke with the Electronic Frontier Foundation (EFF), which is providing to the students, pro bono, the independent legal representation that they need. We will remain in close coordination with the students and the EFF to offer assistance in the legal proceedings.

Beyond this specific case, I believe we should provide our student inventors and entrepreneurs with a resource for independent legal advice, singularly devoted to their interests and rights. I have asked the Provost, Chancellor and General Counsel to develop and submit to me a specific proposal for creating such a resource, which will add an essential new strength to MIT's innovation ecosystem.

When the MIT community works together, we spot problems, analyze them and solve them. Let's solve this one together.

Sincerely,L. Rafael Reif

http://www.coindesk.com/mt-gox-users-awaiting-funds-survey-reveals/

68% of Mt. Gox Users Still Awaiting Their Funds, Survey Reveals

A CoinDesk poll of nearly 3,000 readers has found that Mt. Gox customers have been waiting months for their withdrawal requests to be fulfilled, despite being ‘verified’ or ‘trusted’ account holders. Poll respondents describe frustration with the exchange’s customer service, calling it slow, opaque and providing “canned responses”.

The poll, launched on 4th Feb, discovered that customer requests were long delayed, whether they were in bitcoin or fiat currency.

One incensed customer was Daniel Smith of Stoke-on-Trent, England. He contacted CoinDesk in December to report his frustration with the exchange’s customer service.

Smith does not have a verified account with the exchange, although he still managed to deposit bitcoin to his account there. Because of this unverified account status, his recent attempts to withdraw his currency have been unsuccessful.

After opening several customer service tickets spanning dozens of messages, Smith’s tickets were eventually merged and closed. At a loss, Smith made a legal statement with Staffordshire police that he said was being passed on to the “fraud division” to deal with the “theft” of his bitcoin.

Smith is also in contact with a lawyer in Japan to explore legal action. In January, he reported that his account had been “blocked” as was his log-in for customer service tickets. “I cannot receive help requests or log into my account […] Essentially they have taken my bitcoin and have told me to fk [sic] off,” he said.

Breakdown of withdrawal stats

Yet, it appears that Smith isn’t alone. Of the 1,434 readers who responded to the question of whether they were able to successfully withdraw funds from the exchange, slightly less than a third (31.59%) reported successful withdrawals, while 68% said they were still waiting for their funds.

Customers with successful withdrawals were also likely to receive their money quickly. Of the successful withdrawals, nearly half said they received their funds in under a week. About 46% reported receiving their funds within three months. Very few successful respondents – about 4% – said they received their funds more than three months after making the initial withdrawal request.

But for the customers who still haven’t seen their funds, waiting times could stretch for months. Among respondents who were still waiting for their funds (30% of unsuccessful respondents), the median waiting time was between one to three months. Some 21% had been waiting for three months or more, while about 48% had been waiting for less than a month.

What were the factors that affected successful withdrawal rates? When we filtered the poll results for respondents who had ‘verified’ or ‘trusted’ accounts with Mt. Gox (ie they had submitted identification documents and been approved by the exchange) around 69% were still waiting for their funds.

This is in line with the overall proportion of respondents with unsuccessful withdrawal requests. So, it appears that verification did little to improve their chances.

Respondents trying to withdraw BTC from the exchange appeared to improve their chances of success.

Successful respondents increased by about 6% for BTC withdrawals. But withdrawals in fiat currency (defined here as US dollars, euros, Chinese yuan and Japanese yen) reduced the chances of a successful withdrawal by about 3%.

Some instant withdrawals

However, some respondents did report smooth withdrawal transactions at Mt. Gox.

Some 11 individuals who responded with descriptions of their transactions at the exchange described the withdrawal process as “instant” or completed within days. All these respondents had made bitcoin withdrawals.

Nevertheless, even among this group of successful respondents, there were hiccups. One individual reported withdrawing 100 BTC in early February that arrived in his wallet outside Mt. Gox “instantly”. However, two days later, a withdrawal request for an identical amount of bitcoin did not appear.

Another respondent reported a similar experience, withdrawing 14 BTC in mid-January which was transferred instantly, but then failing to receive a transfer of 1.405 BTC that was withdrawn in the first week of February.

The amount was refunded to his Mt. Gox account four days after a support ticket was created. The respondent then made a withdrawal request again and the amount was instantly transferred outside the exchange.

“Very glad to have got the BTC back and would like a detailed, transparent explanation of the problems they’ve been having,” he wrote.

Support-ticket frustration

Respondents were most frustrated with the way Mt. Gox had handled their support tickets. Several users voiced their suspicion that the exchange was using generic, automated responses to mollify angry customers. One respondent noted:

“Tried to withdraw BTC and failed, never showed up in my wallet. Opened a support ticket, after a week, they send me a message apologising for the long wait times […] they were completely non-responsive to the issue and my questions. I think it was some sort of robot auto-responder designed to make people give up, go away, and abandon their bitcoins at Mt. Gox. Not acceptable!”

Another respondent who tried to withdraw 4.5 BTC complained that his support ticket didn’t get a response from the Tokyo-based exchange. Additionally, he was unable to contact a customer service representative through the exchange’s live chat feature:

“Zero response from Mt. Gox. There is never an available ‘online agent’. I logged a support ticket when I noticed [my transaction] was not in the block chain.”

The 5% queue-cutting fee

Of the 569 respondents who wrote up descriptions of their Mt. Gox experience, eight mentioned that the exchange had offered to speed up the processing of their withdrawal requests for a fee of 5% of the transaction amount. Mt. Gox’s FAQ for withdrawals and deposits does not mention a 5% fee for quicker withdrawals.

One respondent wrote that his experience with Mt. Gox was “completely maddening”, having taken him three months to withdraw fiat currency. According to the respondent, the exchange offered to move him to the head of its transaction queue if he paid a fee of 5% on top of his withdrawal amount. The respondent was attempting to withdraw $200,000.

“Their support responses were full of false promises that the withdrawal would be processed ‘shortly’ due to vague ‘delays’ and ‘issues’.”

Another respondent, who attempted to withdraw $44,000 and 1,951 BTC on two occasions, was also given the option of paying the 5% fee to speed up the withdrawal process:

“Mt. Gox has become a nightmare. To receive timely support requests from them is like performing major surgery on oneself […] they delayed over five weeks on USD withdrawal requests without explanation, only ‘offering’ me to pay a 5% fee to ‘expedite’ the procedure,” the respondent wrote.

Combatting opacity

The major complaint that customers had about the exchange was its transparency, or lack of it.

Many respondents didn’t know if their withdrawals were being processed, how long it would take or how much it would cost to ultimately receive their funds. Customer service tickets were routinely closed before problems were resolved, and many people had trouble getting hold of ‘live’ agents.

Bitcoin Regulation in the UK

Eitan Jankelewitz is a technology lawyer at the law firm Sheridans. He provides commercial legal advice to all kinds of technology businesses, including some operating in the bitcoin economy.

In this article, Jankelewitz explains how UK regulation applies to bitcoin and other digital currencies. He also describes the approach to compliance generally taken by UK businesses.

The UK, especially London, is considered a global centre for financial services and new technologies.

You might assume, therefore, that the UK would be a great adoptive home for bitcoin and other digital currencies. Digital currency is, after all, the ultimate example of a finance/technology hybrid. Well, you would be right.

The British public has shown keen interest in digital currencies – the London bitcoin meetup is possibly the biggest in the world and there are numerous other events and meetings being held in cities up and down the UK.

Britain is also home to some of the world’s most popular bitcoin products and services. Despite this, the UK’s government and regulators have been remarkably quiet on the subject of digital currencies, and have left the development and adoption of digital currencies largely unacknowledged.

There are three areas of regulation to consider when examining this subject: consumer protection; the prevention of money laundering, and taxation. Foreign regulations also have certain implications for those operating in the UK.

Consumer protection

In the UK, the Financial Conduct Authority (FCA) is the regulator with responsibility for ensuring that financial services are provided in a way that protects consumers and maintains the integrity of the market. The FCA regulates businesses that provide financial services or promote financial services (whether retail or wholesale).

In the last year, a number of bitcoin businesses have approached the FCA seeking clarification on the legalities of operating bitcoin exchanges.

However the FCA has not offered any constructive guidance or comment on the regulation of digital currencies. In fact, the FCA has gone as far as stating it does not regulate digital currencies and has no intention of doing so. The result is that bitcoin businesses in the UK are not obliged to register with or be authorised by the FCA.

The UK has a well-established tradition of self-regulation. Despite the regulator’s approach, a number of bitcoin businesses have told me that they act in accordance with FCA rules, even though they are not required to do so.

Without any formal guidance, businesses act on their own interpretation of what the rules ought to be. As a result, an unusual scenario has arisen: instead of regulators chasing after businesses and insisting on compliance, UK businesses are chasing after regulators and insisting on rules with which they can comply.

There was even one instance where, allegedly, the FCA, on discovering that a bitcoin business had managed to add itself to an FCA register, politely invited that business to de-register itself.

Prevention of money laundering

The prevention of money laundering is taken very seriously in the UK and indeed in many countries around the world.

In the UK, the Money Laundering Regulations 2007 set out who must assist the prevention of money laundering and provide steps on how this should be achieved. Customer due diligence is central to these regulations – businesses should know where money is coming from by identifying their customers.

The Money Laundering Regulations 2007 are enforced by a number of entities, principally the UK’s tax authority, the HMRC (HM Revenue & Customs), and the FCA, but also some others. For example, lawyers are obligated to conduct customer due diligence by the Law Society.

In the UK, however, there is no formal obligation to take any steps to prevent money laundering through dealings made in bitcoin. This is quite remarkable. Compare this to the position in the US, where businesses must comply with anti-money laundering regulations at a federal level and then essentially repeat this compliance in almost every other state.

Once again, UK businesses take regulation into their own hands. UK bitcoin businesses seem, for the most part, to all take some measure or another to try and identify their customers for the purposes of preventing money laundering.

It is fair to say that some businesses go above and beyond what would be required if their business was dealing with pounds sterling rather than bitcoin. The reason for this is simple: UK businesses don’t think that this status quo can be maintained for much longer.

If (or, indeed, when) UK bitcoin businesses are required to comply with anti-money laundering regulation, those businesses could be obligated to undertake customer due diligence on their entire existing customer base. This could be an overwhelming task for a company that has been in business for some years.

Businesses may eventually even be required to report all of their previous dealings as part of a suspicious activity report. It therefore makes much more sense to identify customers from the outset in order to be prepared for these requirements.

Taxation

Four or five months ago, after receiving a number of requests from bitcoin stakeholders about the VAT (value added tax) treatment of bitcoin, HMRC began to issue guidance in the form of a letter.

The guidance stated that bitcoin was to be treated as a single-purpose face-value voucher. This type of voucher is, as the name suggests, redeemable for just a single use. This means that at the time the voucher is bought, it is known whether or not VAT is chargeable on the goods or services for which the voucher can be redeemed. HMRC therefore charges VAT on the purchase of the voucher – they don’t wait around for the redemption.

If you know a little about bitcoin, you will know you can buy more than just one thing with it. It seems to me that someone at HMRC had simply misunderstood bitcoin, but the consequences were serious – anyone selling bitcoin or operating an exchange would have to charge VAT on the value of the bitcoin being sold. This meant that no UK exchange could be both compliant and competitive.

Along with a few others, I was lucky enough to be invited to HMRC to talk about this particular point. Following the meeting, HMRC agreed to withdraw this guidance and re-examine bitcoin to see how VAT should be applied to it.

For once UK businesses were happy to have no regulation. We were told that VAT would most likely be charged on bitcoin service charges, but not bitcoin itself. Therefore an exchange would have to charge VAT on its commission, but not on the bitcoins traded.

HMRC is continuing to consider how best to tax bitcoin and meetings with stakeholders are ongoing. I also understand that HMRC is considering all other aspects of taxation, not just VAT. Hopefully we will see some development in this area soon and a definitive position on how bitcoin businesses should account for tax.

Foreign Regulation

Just because there is so little regulation in the UK, it doesn’t mean that UK businesses aren’t affected by foreign laws. Regulations in the US have a habit of reaching beyond the borders of the 50 states.

In the US, operating a money transmission business is regulated by the Financial Crimes Enforcement Network (FinCEN) at a federal level, and then again at state level.

In order to be compliant throughout the US, money transmitters must comply with all sorts of customer due diligence obligations and maintain many expensive registrations in each state in which their services are available. Famously, on 18 March 2013, FinCEN extended the scope of this regulation to bitcoin exchanges and others buying and selling bitcoin or other digital currencies.

Unfortunately for UK businesses, this regulation has extraterritorial scope – it even applies to non-US businesses providing their services to US citizens.

Given the burden of complying with US regulation, most UK businesses simply close their doors to US citizens until they are ready to expand into the US market and have sufficient funds to undertake the compliance process. This involves geo-blocking US IP addresses, as well as any blocking any contact made through VPNs or TOR.

Conclusion

The lack of regulation in the UK has caused more problems than opportunities for bitcoin businesses.

Unable to be sure of what regulation is on the horizon and keen to avoid future liability, bitcoin businesses often find themselves taking more regulatory measures than regulated businesses.

On top of this is the biggest problem facing bitcoin in the UK – access to UK banking services. In short, there isn’t any. With the regulatory picture unclear, banks consider it too risky to offer bitcoin businesses a bank account.

In jurisdictions around the world, law makers and regulators are considering if and how to bring digital currencies under their regulatory frameworks.

Meanwhile the entrepreneurs, who can’t help but get started on their new businesses, are left second-guessing what form this new regulation will take and what effect it will have on their own particular business.

Until the inevitable question of regulation is settled, one way or another, digital currency businesses will be unable reach their true potential.

Update 2 I've did a search of the IP address. I believe it doesn't belongs to any tor node, proxy or VPN. Hence it is very likely that 185.17.1.222 is either a dynamic or static IP from Longbow Electric Llc.